Edited version of private ruling

Authorisation Number: 1011486465455

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Ruling

Subject: capital gains tax

Question 1

Are you subject to CGT on the land acquired prior to 20 September 1985?

Answer

No.

Question 2

Is a building constructed after 20 September 1985 on land acquired prior to 20 September 1985 subject to CGT?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

Your holiday home was originally acquired by the purchase of a crown lease from a third party before 1980.

You converted the title to freehold after 1985 by making a payment to the state government.

You constructed a new building on the property after 1985.

You have the property on the market.

The property is not your main residence and it has not been used for income producing purposes.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-55.

Income Tax Assessment Act 1997 Subsection 104-10(5).

Income Tax Assessment Act 1997 Subsection 108-55(2).

Income Tax Assessment Act 1997 Paragraph 108-55(2) (a).

Income Tax Assessment Act 1997 Paragraph 108-55(2)(b).

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 102-20.

Reasons for decision

The land

A capital gain or capital loss is made as a result of a capital gains tax (CGT) event happening to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

When a Crown Lease is converted to a freehold title, a CGT event occurs. You dispose of a right (the Crown Lease) and acquire a new right (the freehold title) as a replacement asset.

On the conversion of a Crown Lease to freehold title replacement asset roll-over in accordance with Subdivision 124-J of the ITAA 1997 happens. The roll-over is automatic and any capital gain or capital loss made from the original asset is disregarded (subsection 124-10(2) of the ITAA 1997).

As the freehold was acquired as a result of replacement asset roll-over, the date of acquisition of the freehold is taken to have been acquired prior to 20 September 1985 because you acquired the Crown Lease before 20 September 1985 (subsection 124-10(4) of the ITAA 1997).

When you sell your interest in the freehold title, there will be a change of ownership and CGT event A1 will occur (section 104-10 of the ITAA 1997). As you are taken to have acquired your freehold title prior to 20 September 1985, any capital gain or capital loss made on the disposal is disregarded (subsection 104-10(5) of the ITAA 1997).

The building

For CGT purposes there are exceptions to the common law principle that what is attached to the land is part of the land.

A building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset from the land if (section 108-55 (2)):

(a) You entered into a contract for the construction on or after that day; or

(b) If there is no contract- the construction started on or after that day.

Because you acquired the land prior to 20 September 1985 (pre-CGT) and the dwelling was constructed after that date (post-CGT), for the purposes of capital gains tax, the building will be considered to be a separate CGT asset from the land.

While the land will be exempt from capital gains, the building will not. Upon the disposal of the property capital gains tax will be payable upon the gain made on the disposal of the building.

Calculating your capital gain & cost base

You make a capital gain if your capital proceeds are more than your cost base. You make a capital loss if your reduced cost base is more than your capital proceeds.

The cost base of a CGT asset is made up of 5 elements (section 110-25):

1. Money paid or required to be paid for the asset.

2. Incidental costs of acquiring the asset, or costs in relation to the CGT event, for example Stamp duty, legal fees, accountants' advice, etc.

3. Non capital costs you incur in connection with your ownership, for example interest, rates, land tax, repairs and insurance premiums (provided that you have not, or could not have claimed these as a deduction).

4. Capital expenditure you incur to increase the value of the asset, if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.

5. Capital expenditure you incur to preserve or defend your title rights to the asset.

Apportionment

Where expenditure relates to a particular CGT asset this amount is included in the cost base of that asset. However, if the expenditure relates to two or more assets, the expenditure will have to be reasonably apportioned between the exempt and taxable assets in determining their cost base.

For example, the construction of the building and the acquisition cost of the land relate to separate assets and as such they are included in the cost base of the individual asset. However, any fees on the sale of the land and building together will need to be apportioned. You will need to be in a position to justify the estimates that you make.

Similarly, the capital proceeds will have to be apportioned between the assets.

While the legislation does not give any guidelines on how this apportionment is to be made, there are two Taxation Determinations (TD 9 and TD 98/24).

TD 9 states that each taxpayer should take whatever steps are appropriate to determine the valuation of a particular asset and be able to justify the estimate. TD 98/24 says that the apportionment should be based upon market values of the separate assets at the time of the contract.